return on investment

How to Calculate Return on Investment for your property

Brandon Turner, author of The Book on Rental Property Investing, said “Wealth creation through real estate starts with correct math”. Thus, it actually emphasize the importance of Return of Investment.

A veteran investor in real estate envisions to maximize their Return on Investment (ROI). It is the indicator of profitability of investment & also the measure of the lucrativeness of it. Therefore, every property investor must know how to calculate the ROI for his/her property.

But calculating ROI for your property is a confusing task & it becomes more difficult if you are naive. Here is the complete guide to enlighten you about ROI calculations for property.

The Cost Method

The cost method is one of the easiest methods for calculating the ROI for your property.

Let us assume that a particular property is purchased for PKR. 200,000. The investor has done repairs & rehab which costs him/her PKR 50,000. Now the overall property value is raised to PKR. 300,000.

So, the Total Investment at time is:

PKR 200,000 (Actual cost of property) + 50,000 (Additional investment) = 250,000

Equity Position of the investor would be:

300,000(Current market value of property) – 250,000 (Total amount spent) = 50,000

ROI% = Equity ÷ Total investment

=50,000 ÷ 250,000

= 20%

Thus, the return on investment for this property will be 20% as per cost method

Also Read : Why invest in Pakistan Real Estate

The out of pocket method

This is the most desirable method for investors as it offers higher ROI percentage. In this method, we have to focus on the actual amount spent by the investor at that moment.

Let us assume that an investor interested in buying a property valued PKR. 100,000. This time he/she have just paid PKR 20,000 as down payment of property. In addition, PKR 50,000 has invested for maintenance & repairing. The overall cost of property is raised to PKR 200,000.

For now, the total out-of-pocket amount is:

= Down Payment + Maintenance & Repairs

= PKR 20,000 + PKR. 50,000

= PKR. 70,000

Taking Equity Position of Investor as:

= PKR. 200,000 – PKR. 70,000

= PKR. 130,000

ROI% = Equity ÷ Current Market Value

= 130,000 ÷ 200,000

= 65%

Calculating ROI for Rental Properties

Calculating ROI on rental property is quite different from the one mentioned above.

Let us assume you have bought a property for PKR 100,000. The overall closing cost is PKR 5000 and repairing costs PKR 5000. So the total investment in property is PKR 110,000.  Now you rent out your property for PKR 1000 per month.

The total rental income or annual return is:

=Monthly income x 12

=PKR 1000 x 12

=PKR 12000

ROI% = Annual return ÷ Amount of the total investment

=12000 ÷ 110,000

= 10.9%

Other complications

There are certain factors that affect the overall ROI calculations. In real estate market, trends vary abruptly. In any market, properties sold out most of the time below-market value which will reduce the ROI. Furthermore, there are certain other additional costs including closing costs that alters ROI.

Refinancing or second mortgages on the property can also influence your ROI calculations. Lastly, while calculating the ROI, it’s significant to focus all other possible cost factor involved to guarantee the most accurate ROI percentage.

7 thoughts on “How to Calculate Return on Investment for your property”

  1. I wish to express my appreciation to this writer just for bailing me out of this issue. Because of checking throughout the world wide web and finding suggestions which were not powerful, I was thinking my entire life was well over. Living without the presence of solutions to the problems you’ve fixed through your main article is a critical case, and the ones which could have in a wrong way damaged my career if I had not encountered your blog. Your main knowledge and kindness in dealing with the whole thing was important. I don’t know what I would have done if I had not come upon such a point like this. I am able to at this point relish my future. Thank you very much for the reliable and amazing help. I won’t think twice to recommend your web sites to anybody who needs to have direction on this situation.

  2. I and my pals happened to be looking through the great points from the blog while before long I got a horrible feeling I never thanked you for those tips. My guys were definitely consequently warmed to learn them and now have absolutely been taking pleasure in these things. Thank you for truly being well considerate and then for having certain high-quality subject areas most people are really needing to discover. My very own honest regret for not expressing appreciation to sooner.

  3. Thanks a lot for providing individuals with a very wonderful possiblity to read from this web site. It’s usually very ideal and as well , jam-packed with amusement for me and my office acquaintances to search your blog minimum three times weekly to read the fresh guidance you have got. And indeed, I’m certainly amazed considering the mind-blowing techniques served by you. Certain two areas in this post are basically the very best I’ve ever had.

  4. I truly wanted to post a quick message to thank you for some of the awesome points you are giving on this site. My time-consuming internet lookup has finally been honored with good quality tips to go over with my friends and family. I ‘d say that most of us readers are undoubtedly lucky to dwell in a decent site with very many marvellous individuals with insightful concepts. I feel rather lucky to have discovered the site and look forward to tons of more cool moments reading here. Thanks a lot once again for everything.

  5. I precisely had to thank you so much once more. I’m not certain the things that I could possibly have sorted out in the absence of the entire solutions discussed by you over this area. Certainly was the scary difficulty for me personally, however , seeing your specialized approach you handled the issue took me to cry for contentment. I’m just thankful for your help as well as pray you really know what a powerful job your are carrying out instructing the others through a web site. I am sure you haven’t met any of us.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top